5 ms·

Rent. Rent is probably cheaper than ownership, except for the investment component. Because the market isn't efficient here, and because of the asset growth,

by Digory 7y ago

Rent. Rent is probably cheaper than ownership, except for the investment component. Because the market isn't efficient here, and because of the asset growth, owners can get a positive return even if rent doesn't pay the full mortgage.

vonmoltke 7y ago
> Rent is probably cheaper than ownership, except for the investment component. So, your landlord is cash flow negative? Why would anyone buy property to rent it out if this were the case universally?
- mactrey 7y ago
  Maybe because > owners can get a positive return even if rent doesn't pay the full mortgage
- refurb 7y ago
  Appreciation. Having your home go up $200K in value makes taking a $1K monthly loss easy.
  - vonmoltke 7y ago
    That assumes a hot market where values are riding quickly. The math doesn't work very well if the value growth is around the typical 3% per year. Also, if the value of appreciation really is that high I don't think it is correct to leave that forfeited value out of the "renting is cheaper" equation.
- conanbatt 7y ago
  It isn't. But also rental property and ownership property are not the same kind of properties.
  - vonmoltke 7y ago
    First, that's not entirely true. We just moved out of a half-duplex that we could have bought if we wanted to (the owners decided to sell it near the end of our lease term). Second, in the case they are different kinds if properties, comparing them on cost alone isn't valid.
    - conanbatt 7y ago
      Properties worth paying to live in vs Properties worth renting have an intersection, but they are very distinct groups.
      - vonmoltke 7y ago
        Yes, that was my point. Saying that renting is almost always cheaper than buying when the properties for rent are inferior to the properties for sale is meaningless. Renting the properties that are worth buying is not almost always cheaper, except in certain markets at certain times.
- chii 7y ago
  the "rule of thumb" is to rent out for 5% (per annum) of the price of the property. This is the unrecoverable cost of owning a property - 1% in maintenance, 1% in property taxes, and lastly, the cost of capital (which, i've set it at 3% as an estimate). If your rent is exactly 5%, then the landlord is cashflow neutral, and the property appreciation is what the landlord gains. If your rent is below 5%, it's a good deal, and if it's above 5%, you're getting shafted by your landlord.
  - vonmoltke 7y ago
    Interesting. I have not heard this rule before (and I assume it's modified by the actual tax rate). That said, unless the local real estate market is strong I don't think it makes sense as an investment to break even on the rent. It's a lot of headache and risk to bet on a >5%[1] average annual appreciation. I don't think that is a reasonable rate to expect in many (most?) real estate markets. [1] My personal ballpark for a reasonable return.
    - chii 7y ago
      This video explains the concept really well: https://www.youtube.com/watch?v=Uwl3-jBNEd4 https://www.youtube.com/watch?v=Uwl3-jBNEd4 but TLDW; the unrecoverable cost of rent is just the rent money, and a lot of people compare it with a mortgage incorrectly. A mortgage is not 100% unrecoverable, but some portions of it is unrecoverable (the interest). The other unrecoverable cost of owning is the initial downpayment. The 3% capital cost is the combination of the above interest payment and the lost income opportunity from the downpayment. Whether you buy out right with cash, or get a mortgage, you still end up paying a price either way (via interest, or via lost opportunity to deploy the cash downpayment).

by Digory 7y ago

vonmoltke 7y ago

> Rent is probably cheaper than ownership, except for the investment component. So, your landlord is cash flow negative? Why would anyone buy property to rent it out if this were the case universally?

mactrey 7y ago
Maybe because > owners can get a positive return even if rent doesn't pay the full mortgage
refurb 7y ago
Appreciation. Having your home go up $200K in value makes taking a $1K monthly loss easy.
- vonmoltke 7y ago
  That assumes a hot market where values are riding quickly. The math doesn't work very well if the value growth is around the typical 3% per year. Also, if the value of appreciation really is that high I don't think it is correct to leave that forfeited value out of the "renting is cheaper" equation.
conanbatt 7y ago
It isn't. But also rental property and ownership property are not the same kind of properties.
- vonmoltke 7y ago
  First, that's not entirely true. We just moved out of a half-duplex that we could have bought if we wanted to (the owners decided to sell it near the end of our lease term). Second, in the case they are different kinds if properties, comparing them on cost alone isn't valid.
  - conanbatt 7y ago
    Properties worth paying to live in vs Properties worth renting have an intersection, but they are very distinct groups.
    - vonmoltke 7y ago
      Yes, that was my point. Saying that renting is almost always cheaper than buying when the properties for rent are inferior to the properties for sale is meaningless. Renting the properties that are worth buying is not almost always cheaper, except in certain markets at certain times.
chii 7y ago
the "rule of thumb" is to rent out for 5% (per annum) of the price of the property. This is the unrecoverable cost of owning a property - 1% in maintenance, 1% in property taxes, and lastly, the cost of capital (which, i've set it at 3% as an estimate). If your rent is exactly 5%, then the landlord is cashflow neutral, and the property appreciation is what the landlord gains. If your rent is below 5%, it's a good deal, and if it's above 5%, you're getting shafted by your landlord.
- vonmoltke 7y ago
  Interesting. I have not heard this rule before (and I assume it's modified by the actual tax rate). That said, unless the local real estate market is strong I don't think it makes sense as an investment to break even on the rent. It's a lot of headache and risk to bet on a >5%[1] average annual appreciation. I don't think that is a reasonable rate to expect in many (most?) real estate markets. [1] My personal ballpark for a reasonable return.
  - chii 7y ago
    This video explains the concept really well: https://www.youtube.com/watch?v=Uwl3-jBNEd4 https://www.youtube.com/watch?v=Uwl3-jBNEd4 but TLDW; the unrecoverable cost of rent is just the rent money, and a lot of people compare it with a mortgage incorrectly. A mortgage is not 100% unrecoverable, but some portions of it is unrecoverable (the interest). The other unrecoverable cost of owning is the initial downpayment. The 3% capital cost is the combination of the above interest payment and the lost income opportunity from the downpayment. Whether you buy out right with cash, or get a mortgage, you still end up paying a price either way (via interest, or via lost opportunity to deploy the cash downpayment).